Banking blues: Rise in NPA points to a rough ride ahead

Early in February this year, Pratip Chaudhuri, the chief of State Bank of India, was bold enough to say that the worst was over for India's top lender, while unveiling his bank's third-quarter results. "The worst is over. Non-performing assets have plateaued and we do not see any acceleration . The NPA storm that had hit us in 2011 is now hitting other banks," Chaudhuri had told the media. The CEOs of quite a few banks had echoed similar views, saying that bad loans had peaked.

They blamed the rise in bad loans to a newly-introduced system where bad loans were flagged off in a customised software, without any manual intervention as was done in the past. This resulted in reversal of interest income.

Bankers justified that once migrated fully to this new system, the pain would cease. However, holes have been blown into that argument after SBI shocked the market with its numbers for the quarter to June 2012.

The bank's slippages — fresh bad loans — stood at Rs 10,844 crore. Many other banks, too, have seen significant rise in slippages. Indian Overseas Bank's fresh bad loans almost doubled to Rs 865 crore and it almost tripled for the Central Bank of India to Rs 1,448 crore.

In the June quarter, most state-run banks, barring a few, showed moderate growth in their earnings. Analysts said that the unprecedented growth in profit for Bank of India in the June quarter was hardly a surprise, considering that was the last quarterly result for its current chairman.

The top three private banks, ICICI Bank, HDFC Bank and Axis Bank, too, maintained consistency in their earnings. What is troubling many is whether banks, especially the PSU banks, took a realistic call in the past, while assessing their performance and outlook.

"Few big-ticket troubled accounts, like Kingfisher Airlines, are classified as bad loans. A number of troubled accounts are either restructured before they turn bad or the borrowers are knocking at the doors of the corporate debt restructuring cell. Thus, we expect stress on asset quality to continue in the second quarter," said Hemindra Hazari, head of research institutional equities at Nirmal Bang Equities. But it is not just the pressure of more bad loans that is a challenge to banks.

They will have to channelise their energy towards mobilising low-cost deposits and growing their balance sheets.

Ironically, demand for loans from better-rated customers has almost dried as most of them prefer to dip into internal accruals or to keep on hold their expansion plans, given the bleak macroeconomic scenario.

Deposits are growing at a much slower pace, something which has caught the attention of even the banking regulator.

Further, low cost deposits are slowly moving out of large banks to smaller private banks that are offering higher rates on savings bank accounts. This is an indication that some of the long-established practices of basic banking — raising deposits, lending and recovery — are being altered.

BA Prabhakar, CMD of Andhra Bank, said: "Banks will have to brace for a slower growth in balance sheet this year. Demand for advances will be low due to a slowdown in the economy.

So, there may not be a big chase for deposits ." But the SBI chief still holds out hope. "The current NPA of 5% is a bit of an aberration... it has peaked." The markets will test him on that.

But for that to happen, banks, which in many ways reflect the state of economic activity, will need a big helping hand from a government struggling to script a strategy for ensuring a rebound in growth. Not many are betting high on that.